For tips on getting a head start on the New Year by making your taxes work for you, read our free “Guide to End-Of-Year Tax Planning.”
Does The State Of The Economy Impact How You Approach Your Financial Planning Strategy?
It’s a fair question, especially as we’ve seen the return of volatility in the latter half of the year. There’s no telling where the market will go in the New Year, but the key to financial success in the long-term is having a set allocation and the discipline to stick to it regardless of the economic environment.
Too many investors tend to let the market drive their investment decisions, a factor that causes them to lose focus and discipline. Often, greed causes investors in up markets to hold onto positions that have done well rather than taking profits. And in down markets, fear causes some to run away from areas that are hit hardest, rather than buy into the areas that are most attractively priced. When the markets are flat or stable, investors often get bored or trade for the sake of trading, without rhyme or reason.
Avoid Market Timing In Favor Of Disciplined Rebalancing
That’s why it’s imperative to stick with your plan. By following a consistent plan, you force yourself in a non-emotional way to buy lower and sell higher. Market timing does not work, but rebalancing does. Having the discipline to rebalance in a targeted and consistent way can help you avoid letting emotions—namely fear and greed—run the show.
Having financial discipline and being focused on a strategy that includes rebalancing will provide consistency in how you approach different economic environments. Having a framework for how decisions should be made will help you navigate different environments and will allow for better long-term thinking.
How Do You Build Financial Discipline?
The best way to build discipline is to establish a holistic financial plan, including short, medium, and long-term goals. Having the right allocation for each goal so that you are taking the appropriate amount of risk and return is critical. Seeking the advice of a financial advisor is a good way to get feedback and suggestions as you make decisions.
7 Steps to Take in 2019
To help you get started on your disciplined approach to financial freedom in 2019 and beyond, here are seven steps to take:
Step 1 – Know Where You Are
This means making a list of all of your assets and debts, as well as a list of your monthly income and expenses. A tool like Personal Capital’s dashboard can help you determine your financial standing.
Step 2 – Put Goals In Place
Do you want to buy a house? Save for retirement? Pay off debt? Whatever your plan, write it down. Rid yourself of bad debt and create an emergency savings account for a rainy day. A good rule of thumb is to save three to six months of expenses in a high yield savings account so it’s fully liquid in the event of an emergency, but not something you rely on for your day-to-day expenses.
Step 3 – Calculate How Much You Need
Figure out how much money you need to save each month to reach your long-term goals. Tools like the Personal Capital Retirement Planner can help with this calculation.
Step 4 – Set A Budget For Monthly Expenses And Savings
You should not only calculate these numbers, but also stick to the budget. Try setting up an auto-deposit from your checking account into an investment account (consider a 401K, IRA or Roth IRA). The auto deposit will force savings so you don’t have to think about it. Seek small ways to save money that will eventually add up — bring your lunch instead of eating out, make coffee at home, etc.
Step 5 – Create An Investment Strategy (And Stick With It)
Talk is cheap, so do more than talk. If you’re unsure of what allocations to make, set up a meeting with an advisor to help you come up with a long-term, well-diversified investment strategy that will best suit your risk tolerance and your goals.
Step 6 – Monitor Your Budget Weekly And Monthly
Tracking your target spending is critical. As you get comfortable sticking to the weekly targets, you may be able to check in only once per month.
Step 7 – Check And Recheck
Rebalance your investment portfolio to your target allocation at least once per quarter.
The most sound strategies are the ones you create and adhere to relentlessly. Have a good plan and stick to it. While that may sound overly simplistic, the best plans are not overly complicated and if you’re in an investment allocation, you are comfortable with sticking to it in good times and bad, should not be difficult.
This article was originally featured in the Winter 2018 of Confident Money, a Personal Capital-sponsored magazine committed to the idea of building confidence and creating the best you at every step of your financial journey. Subscriptions to Confident Money are free.
*Disclaimer: Personal Capital Advisors Corporation is a registered investment advisor with the Securities Exchange Commission (“SEC”). Any reference to the advisory services refers to Personal Capital Advisors Corporation. SEC Registration does not imply a certain level of skill or training. While we can offer a consultation on the financial aspects of these important decisions, it is important that you consult a qualified legal, tax or insurance professional regarding your specific situation.